More and more national regulators are working to provide a legal framework to allow securities crowdfunding. After many Western countries, like the US, the UK, France and Italy, securities crowdfunding entered in the agenda of some Eastern countries’ financial authorities too, like Japan’s and Australia’s. It is now the turn of India, where the Securities and Exchange Board of India (SEBI) has launched in the past week a public consultation on the drafted rules for securities crowdfunding.
The proposed regulation would allow startups and small companies (i.e. firms that have been incorporated for no more than 48 months) to raise capital through equity or lending crowdfunding. In particular SEBI proposes the following rules:
The Issuers
Unlisted Indian companies younger than 48 months and that are not part of an industrial group with annual revenue of minimum Rs 250 million ($ 4,155,550) will be able to raise a maximum of Rs 100 million ($ 1,662,220) per year through crowdfunding portals. Issuers are required to submit a private placement offer letter to the crowdfunding portal, giving a description of the business, issue size, usage of funds, and financial details for the past year. The offer letter must be circulated online to not more than 200 investors.This is also the maximum number of investors a company can get during the online fundraise and it has to include among the subscribers at least one accredited investor who owns at least 5% of the offer. Company’s future projections can only be circulated if they come from a third-party research organization. Issuers are not allowed to use the capital raised through crowdfunding to invest in real estate or to provide loans.
The Investors
SEBI, following the example of what has been done in other countries around the world, identified two categories of investors: accredited investors and retail investors. The former, which include qualified institutional buyers, companies and high-net-worth individuals, do not have any specific limitation on investment. Retail investors, defined as those individuals with a minimum gross annual incomes of Rs 1m ($16,550) or those who have filed income tax returns for the last three years are instead allowed to invest through crowdfunding a maximum Rs 16,000 ($ 275) per offer. No single investor can hold more than 25% of a specific offer.
The platforms
Platforms will need to register with SEBI which regulates their activity. What strikes the most is that, differently from what we have seen so far in other countries, the portals are required to create a ten-member committee in charge of conducting due diligence on the offers available on the platform. The “Screening Committee” has to be composed by professionals coming from the financial sector and from the startups and entrepreneurship world. Additionally to this, the platform has a series of requirements related to transparency and information circulation, as you can read in more details in this document.
The proposed regulations are open to public input until the 16th of July 2014. Overall the drafted legal framework seems to be quite stringent and oriented towards investor protection. According to some local finance experts, it will be long until securities crowdfunding will actually start working in the country. It might also be the case that the regulations, as they are drafted now, create too many consistent obstacles to platforms, investors and companies to allow crowdfunding to unleash its full potential.
References
Anuradha, S. & Stanton, D. (2014). India to allow crowdfunding. IFR Asia
SEBI. Consultation Paper on Crowdfunding in India.
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1403005615257.pdf
Image credit to: Dinesh Cyanam http://bit.ly/1syiE2N
The Issuers
Unlisted Indian companies younger than 48 months and that are not part of an industrial group with annual revenue of minimum Rs 250 million ($ 4,155,550) will be able to raise a maximum of Rs 100 million ($ 1,662,220) per year through crowdfunding portals. Issuers are required to submit a private placement offer letter to the crowdfunding portal, giving a description of the business, issue size, usage of funds, and financial details for the past year. The offer letter must be circulated online to not more than 200 investors.This is also the maximum number of investors a company can get during the online fundraise and it has to include among the subscribers at least one accredited investor who owns at least 5% of the offer. Company’s future projections can only be circulated if they come from a third-party research organization. Issuers are not allowed to use the capital raised through crowdfunding to invest in real estate or to provide loans.
The Investors
SEBI, following the example of what has been done in other countries around the world, identified two categories of investors: accredited investors and retail investors. The former, which include qualified institutional buyers, companies and high-net-worth individuals, do not have any specific limitation on investment. Retail investors, defined as those individuals with a minimum gross annual incomes of Rs 1m ($16,550) or those who have filed income tax returns for the last three years are instead allowed to invest through crowdfunding a maximum Rs 16,000 ($ 275) per offer. No single investor can hold more than 25% of a specific offer.
The platforms
Platforms will need to register with SEBI which regulates their activity. What strikes the most is that, differently from what we have seen so far in other countries, the portals are required to create a ten-member committee in charge of conducting due diligence on the offers available on the platform. The “Screening Committee” has to be composed by professionals coming from the financial sector and from the startups and entrepreneurship world. Additionally to this, the platform has a series of requirements related to transparency and information circulation, as you can read in more details in this document.
The proposed regulations are open to public input until the 16th of July 2014. Overall the drafted legal framework seems to be quite stringent and oriented towards investor protection. According to some local finance experts, it will be long until securities crowdfunding will actually start working in the country. It might also be the case that the regulations, as they are drafted now, create too many consistent obstacles to platforms, investors and companies to allow crowdfunding to unleash its full potential.
References
Anuradha, S. & Stanton, D. (2014). India to allow crowdfunding. IFR Asia
SEBI. Consultation Paper on Crowdfunding in India.
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1403005615257.pdf
Image credit to: Dinesh Cyanam http://bit.ly/1syiE2N
About the author - Irene Tordera
Born and raised in Milan, Italy, Irene is an International Business graduate, with a strong interest for innovative ideas that can simplify our lives.
During her studies, she co-founded an online community for sportspeople and worked in marketing positions at Ogilvy & Mather Advertising and at the European Business Angel Network, in Brussels. She is a passionate blogger about crowdfunding and the startup ecosystem.
Born and raised in Milan, Italy, Irene is an International Business graduate, with a strong interest for innovative ideas that can simplify our lives.
During her studies, she co-founded an online community for sportspeople and worked in marketing positions at Ogilvy & Mather Advertising and at the European Business Angel Network, in Brussels. She is a passionate blogger about crowdfunding and the startup ecosystem.
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